CASE 1

Virgin Atlantic airline is considering the purchase of 3 new passenger aircraft. This aircraft has the capacity of 400 passengers at an expected load factor value of 0.95. A fare of $275 one-way will be charged and the air plane will make an expected 300 one-way crossings per year. The aircraft will cost $900,000 each. Operations and maintenance expenses will be $727,500 per year. It is estimated that this major purchase will yield an increase of $120,000/year in gross income. Resale value of the air craft will be $350,000. Depreciation under MACRS is over a life of 7 years. The airline is in the 46% tax bracket. Management wants to report the highest possible earnings to stockholders in the near future, yet also wants to minimize taxable income. What will be the MACRS depreciation deduction recorded for the period under review?